Karnataka Class 12 Commerce Economics Law Of Demand :

In this article we will discuss about:- 1. Introduction to the Law of Demand 2. Assumptions of the Law of Demand 3. Exceptions.

Introduction to the Law of Demand:

The law of demand expresses a relationship between the quantity demanded and its price. It may be defined in Marshall’s words as “the amount demanded increases with a fall in price, and diminishes with a rise in price”. Thus it expresses an inverse relation between price and demand. The law refers to the direction in which quantity demanded changes with a change in price.

On the figure, it is represented by the slope of the demand curve which is normally negative throughout its length. The inverse price- demand relationship is based on other things remaining equal. This phrase points towards certain im­portant assumptions on which this law is based.

Assumptions of the Law of Demand:

These assumptions are:

(i) There is no change in the tastes and preferences of the consumer;

(ii) The income of the consumer remains constant;

(iii) There is no change in customs;

(iv) The commodity to be used should not confer distinction on the consumer;

(v) There should not be any substitutes of the commodity;

(vi) There should not be any change in the prices of other products;

(vii) There should not be any possibility of change in the price of the product being used;

(viii) There should not be any change in the quality of the product; and

(ix) The habits of the consumers should remain unchanged. Given these conditions, the law of demand operates. If there is change even in one of these conditions, it will stop operating.

ADVERTISEMENTS:

Given these assumptions, the law of demand is explained in terms of Table 3 and Figure 7.

The above table shows that when the price of say, orange, is Rs. 5 per unit, 100 units are de­manded. If the price falls to Rs.4, the demand increases to 200 units. Similarly, when the price declines to Re.1, the demand increases to 600 units. On the contrary, as the price increases from Re. 1, the demand continues to decline from 600 units.

In the figure, point P of the demand curve DD1 shows demand for 100 units at the Rs. 5. As the price falls to Rs. 4, Rs. 3, Rs. 2 and Re. 1, the demand rises to 200, 300, 400 and 600 units respectively. This is clear from points Q, R, S, and T. Thus, the demand curve DD1 shows increase in demand of orange when its price falls. This indicates the inverse relation between price and demand.

Exceptions to the Law of Demand:

In certain cases, the demand curve slopes up from left to right, i.e., it has a positive slope. Under certain circumstances, consumers buy more when the price of a commodity rises, and less when price falls, as shown by the D curve in Figure 8. Many causes are attributed to an upward sloping demand curve.

(i) War:

If shortage is feared in anticipation of war, people may start buying for building stocks or for hoarding even when the price rises.

(ii) Depression:

During a depression, the prices of commodities are very low and the demand for them is also less. This is because of the lack of purchasing power with consumers.

(iii) Giffen Paradox:

If a commodity happens to be a necessity of life like wheat and its price goes up, consumers are forced to curtail the consumption of more expensive foods like meat and fish, and wheat being still the cheapest food they will consume more of it. The Marshallian example is applicable to developed economies.

In the case of an underdeveloped economy, with the fall in the price of an inferior commodity like maize, consumers will start consuming more of the superior commodity like wheat. As a result, the demand for maize will fall. This is what Marshall called the Giffen Paradox which makes the demand curve to have a positive slope.

(iv) Demonstration Effect:

If consumers are affected by the principle of conspicuous consump­tion or demonstration effect, they will like to buy more of those commodities which confer distinction on the possessor, when their prices rise. On the other hand, with the fall in the prices of such articles, their demand falls, as is the case with diamonds.

(v) Ignorance Effect:

Consumers buy more at a higher price under the influence of the “igno­rance effect”, where a commodity may be mistaken for some other commodity, due to deceptive packing, label, etc.

(vi) Speculation:

Marshall mentions speculation as one of the important exceptions to the down­ward sloping demand curve. According to him, the law of demand does not apply to the demand in a campaign between groups of speculators. When a group unloads a great quantity of a thing on to the market, the price falls and the other group begins buying it. When it has raised the price of the thing, it arranges to sell a great deal quietly. Thus when price rises, demand also increases.

(vii) Necessities of Life:

Normally, the law of demand does not apply on necessities of life such as food, cloth etc. Even the price of these goods increases, the consumer does not reduce their demand. Rather, he purchases them even the prices of these goods increase often by reducing the demand for comfortable goods. This is also a reason that the demand curve slopes upwards to the right.

Karnataka Class 12 Commerce Economics Law Of Demand Complete Notes

Karnataka Class 12 Commerce Economics Law Of Demand : The law of demand is a microeconomics law that states, all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease, and vice versa.

In microeconomics, the law of demand states that, “conditional on all else being equal, as the price of a good increases (↑), quantity demanded decreases (↓); conversely, as the price of a good decreases (↓), quantity demanded increases (↑)“. In other words, the law of demand describes an inverse relationship between price and quantity demanded of a good. The factors held constant refer to other determinants of demand, such as the prices of other goods and the consumer’s income. There are, however, some possible exceptions to the law of demand, such as Giffen goods and Veblen goods

BREAKING DOWN ‘Law Of Demand’

The chart below depicts the law of demand using a demand curve, which is always downward sloping. Each point on the curve (A, B, C) reflects a direct correlation between quantity demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on.

The law of demand is so intuitive that you may not even be aware of all the examples around you.

-When shirts go on sale, you might buy three instead of one. The quantity that you demand increases because the price has fallen.

-When plane tickets become more expensive, you’re less likely to travel by air and more likely to choose the less expensive options of driving or staying home. The amount of plane tickets that you demand decreases to zero because the cost has gone up.

Karnataka Class 12 Commerce Economics Law Of Demand Complete Notes

Karnataka Class 12 Commerce Economics Law Of Demand : The law of demand summarizes the effect price changes have on consumer behavior. For example, a consumer will purchase more pizzas if the price of pizza falls. The opposite is true if the price of pizza increases. John might demand 10 pizzas if they cost $10 each, but only 7 pizzas if the price rises to $12, and only 4 pizzas if the price rises to $20.

The law of demand is one of the most fundamental concepts in economics. It works with the law of supply to explain how market economies allocate resources and determine the prices of goods and services.

Key points

The law of demand states that a higher price leads to a lower quantity demanded and that a lower price leads to a higher quantity demanded.

Demand curves and demand schedules are tools used to summarize the relationship between demand and price.

Demand for goods and services

Economists use the term demand to refer to the amount of some good or service consumers are willing and able to purchase at each price. Demand is based on needs and wants—a consumer may be able to differentiate between a need and a want, but from an economist’s perspective they are the same thing. Demand is also based on ability to pay. If you cannot pay, you have no effective demand.

What a buyer pays for a unit of the specific good or service is called price. The total number of units purchased at that price is called the quantity demanded. A rise in price of a good or service almost always decreases the quantity demanded of that good or service. Conversely, a fall in price will increase the quantity demanded. When the price of a gallon of gasoline goes up, for example, people look for ways to reduce their consumption by combining several errands, commuting by carpool or mass transit, or taking weekend or vacation trips closer to home. Economists call this inverse relationship between price and quantity demanded the law of demand. The law of demand assumes that all other variables that affect demand are held constant.

Demand schedule and demand curve

A demand schedule is a table that shows the quantity demanded at each price.

A demand curve is a graph that shows the quantity demanded at each price.

Here’s an example of a demand schedule from the market for gasoline.

Price (per gallon)

Quantity demanded (millions of gallons)

\$1.00$1.00dollar sign, 1, point, 00

800800800

\$1.20$1.20dollar sign, 1, point, 20

700700700

\$1.40$1.40dollar sign, 1, point, 40

600600600

\$1.60$1.60dollar sign, 1, point, 60

550550550

\$1.80$1.80dollar sign, 1, point, 80

500500500

\$2.00$2.00dollar sign, 2, point, 00

460460460

\$2.20$2.20dollar sign, 2, point, 20

420420420

Price, in this case, is measured in dollars per gallon of gasoline. The quantity demanded is measured in millions of gallons over some time period—for example, per day or per year—and over some geographic area—like a state or a country. Here’s the same information shown as a demand curve with quantity on the horizontal axis and the price per gallon on the vertical axis. Note that this is an exception to the normal rule in mathematics that the independent variable (xxx) goes on the horizontal axis and the dependent variable (yyy) goes on the vertical.

A Demand Curve for Gasoline

The graph shows a downward-sloping demand curve that represents the law of demand. The demand schedule shows that as price rises, quantity demanded decreases, and vice versa. These points are then graphed, and the line connecting them is the demand curve. The downward slope of the demand curve again illustrates the law of demand—the inverse relationship between prices and quantity demanded.

Demand curves will be somewhat different for each product. They may appear relatively steep or flat, and they may be straight or curved. Nearly all demand curves share the fundamental similarity that they slope down from left to right, embodying the law of demand: As the price increases, the quantity demanded decreases, and, conversely, as the price decreases, the quantity demanded increases.

The difference between demand and quantity demanded

In economic terminology, demand is not the same as quantity demanded. When economists talk about demand, they mean the relationship between a range of prices and the quantities demanded at those prices, as illustrated by a demand curve or a demand schedule. When economists talk about quantity demanded, they mean only a certain point on the demand curve or one quantity on the demand schedule. In short, demand refers to the curve, and quantity demanded refers to a specific point on the curve.